Guest Post: Arbitration Update

This post provides brief updates about some decisions of the Supreme Court of India in the year 2011 (this excludes cases which have already been discussed on this blog such as Yograj case here, and P.R Shah case here), which have made significant contribution to the field of arbitration.

In a dispute between the parties, Praveen Enterprises invoked arbitration through proceedings under Section 11 of the Arbitration and Conciliation Act, 1996 (hereinafter, “A&C Act”). State of Goa filed counterclaims against Praveen Enterprises.

Praveen Enterprises argued that these counterclaims were not raised by State of Goa, by way of objection to Section 11 proceedings or at any stage prior to filing its counterclaims (pleadings) before the arbitrator. Therefore, these counterclaims were beyond the scope of reference of disputes to arbitration and State of Goa was barred from raising these counterclaims.

The question before the Supreme Court was, “[W]hether the respondent in an arbitration proceedings is precluded from making a counter-claim, unless a) it had served a notice upon the claimant requesting that the disputes relating to that counter-claim be referred to arbitration and the claimant had concurred in referring the counter claim to the same arbitrator; and/or b) it had set out the said counter claim in its reply statement to the application under section 11 of the Act and the Chief Justice or his designate refers such counter claim also to arbitration.

The Supreme Court held that (a) in an arbitration where the tribunal has been constituted by the court, under Section 11 of the A&C Act, the Chief Justice or the designate is not required to draw up the list of disputes and refer them to arbitration; and (b) where the arbitration agreement provides for referring all disputes between the parties to arbitration, the arbitrator will have jurisdiction to entertain all disputes, even though any such dispute was not raised at a stage earlier to the stage of filing pleadings before the arbitrator.

Judicial precedents show that there has been much litigation on this question. The position was different under the Arbitration Act, 1940, where the Court infact “referred” disputes to arbitration. Accordingly, if a party tried to raise a dispute, which was not covered in the reference made by the Court under the old Act, it was considered to be outside the scope of arbitration

Under A&C Act, there is no “reference” of disputes by the Court to arbitration. Therefore, the position under the two legislations is different. In several arbitrations under the A&C Act, lawyers often tried to use the analysis under the old Act to seek ouster of the adversary’s counterclaims. However, this decision finally lays down an unambiguous position, thus closing doors for the erstwhile famous litigation strategy used in arbitration.

[Disclosure – I have participated in an arbitration where the lawyers for the opponents adopted this strategy]

This is an interesting case in which despite existence of an arbitration clause in the agreement between the parties, Tantia Constructions went to Court to seek relief under its writ jurisdiction, which relief was granted by the High Court.

The Supreme Court held that an alternative remedy (arbitration in this case) is not an absolute bar to invocation of writ jurisdiction.

In my view, this decision increases the scope for interference by courts, in cases where the parties have agreed to resolve their disputes by arbitration, beyond the scope of interference warranted by A&C Act. In a situation where arbitration proceedings have already commenced, this decision could enable a party to seek interim relief in the form of a writ, from a Court, even though the A&C Act clearly provides for provisions for seeking interim relief from Court under Section 9 and from the tribunal itself under Section 17.

3.Booz Allen Hamilton Inc. v. SBI Home Finance Ltd., (2011) 5 SCC 532

In this case SBI Home Finance had filed a suit for enforcement of a mortgage made in its favour. An application was filed by one of the parties under Section 8 of A&C Act, for reference of disputes to arbitration, since there was an arbitration clause agreed to by the parties. The question before the Court was, whether the dispute relating to enforcement of mortgage was covered within the arbitration clause.

The Supreme Court observed that there are three facets of arbitrability, relating to the jurisdiction of the arbitral tribunal, (i) whether the disputes are capable of adjudication and settlement by arbitration, i.e., whether the disputes, having regard to their nature, could be resolved by an arbitral tribunal or whether they would exclusively fall within the domain of Courts, (ii) whether the disputes are covered by the arbitration agreement, and (iii) whether the parties have referred the disputes to arbitration.

We are only concerned with (i) here.

The Court observed that an agreement to sell or an agreement to mortgage does not involve any transfer of right in rem but create only a personal obligation. Therefore if specific performance is sought either in regard to an agreement to sell or an agreement to mortgage, the claim for specific performance will be arbitrable. On the other hand, a mortgage is a transfer of a right in rem. A mortgage suit for sale of the mortgaged property is an action in rem, for enforcement of a right in rem. A decree for sale of a mortgaged property requires the Court to protect the interests of persons other than the parties to the suit and empowers the Court to entertain and adjudicate upon rights and liabilities of third parties (other than those who are parties to the arbitration agreement). Therefore, a suit for enforcement of a mortgage being the enforcement of a right in rem will have to be decided by Courts of law and not by arbitral tribunals.

The Court held that the scheme relating to adjudication of mortgage suits contained in Code of Civil Procedure, 1908, provides for the procedure prescribed for adjudication of the mortgage suits, the rights of mortgagees and mortgagors, the parties to a mortgage suit, and the powers of a Court adjudicating a mortgage suit. This scheme makes it clear that such suits are intended to be decided by public fora and therefore, impliedly barred from being referred to or decided by private fora, namely an arbitral tribunal.

In a dispute arising between the parties, from an unregistered lease deed (which was required to be compulsory registered under the Registration Act, 1908), the question before the Court was whether the parties could rely on such unregistered instrument, as evidence before the arbitral tribunal. The Court also discussed the implications, on the arbitration proceedings, of not stamping the main agreement, which contains the arbitration clause.

The Supreme Court held that an arbitration agreement, forming a part of an instrument, which is required to be stamped under the applicable laws, if not sufficiently stamped, has no legal effect. Although, such deficiency can be cured upon payment of insufficient stamp duty and penalty, as may be applicable.

Such an instrument when required to be compulsorily registered under the Registration Act, 1908, and not so registered, can be received as evidence by an arbitrator only for the limited purpose of (i) evidence of a contract in a suit for specific performance, and (ii) evidence of collateral transaction not required to be effected by a registered instrument.

This is an important development, which should caution parties to adequately stamp and register their agreements, as and when required by law, in order to not face a situation where the agreement itself cannot be received in evidence before an arbitral tribunal.

About the author

V. Niranjan

1 comment

It's probably apt here to mention that the five judge constitutional bench of the Supreme Court is slated to hear reference made in Bharat Aluminium for reconsidering the ratio of Bhatia International on 10th of January, 2012.

The opinions expressed herein are those of the contributors (which shall, for these purposes, include guests) in their personal capacity and do not, in any way or manner, reflect the views of the organizations that the contributors are presently associated with, or that have previously employed or retained the contributors. Postings on this blog are for informational purposes only. Nothing herein shall be deemed or construed to constitute legal or investment advice. Discussions on, or arising out of this, blog between contributors and other persons shall not create any attorney-client relationship.

Many of the links on this blog will take you to sites operated by third parties. The contributors of this blog have not reviewed all of the information on these sites or the accuracy or reliability of any information, data, opinions, advice, or statements on these sites. The contributors do not endorse these sites, or opinions they may offer. These third-party links are offered solely for the purpose of discussion and thinking on Indian corporate law and other related topics. It is also possible that some of the pages linked may become inactive after the lapse of a period of time.